Question

7. (Figure 13.1) There is a decrease in total factor productivity. Which graph best illustrates this change? Wage Wage 100 45 40 35 70 20 15 10 20 10 MRP-D MRP 1 2 3 456 789 10 Quantity of labor 12 3 456 789 10 Quantity of labor Wage 50 45 Wage 35 35 15 10 15 10 MRP- 0 2 3 456789 1o Quantity 12 3 4 5 67 89 10 Quantity of labor of labor O (a) O (b) O (d)

Answer 1

Graph (c) best illustrates the scenario. Total factor productivity measures the change in total production not due to the changes in the factor of production but due to the factors affecting the productivity of the factors of production. For example: technology, education, etc.

Total Factor Productivity is the ratio of output produced to total number of inputs used. Here input is labour. Since total factor productivity is decreasing therefore the denominator of the ratio (input i.e. labour) must increase. Therefore labour demand increase which shift the labour curve from L^D1 to L^D2.